Federal Reserve officials are starting to talk about the conditions under which they would cut interest rates, including a scenario where inflation drifts lower even if the economic growth doesn’t falter.

Such a scenario isn’t seen as particularly likely, and a rate cut isn’t imminent or under consideration for their meeting April 30-May 1. But the thresholds for such action have been a topic of conversations in recent interviews and public remarks.

Inflation rose last year to the Fed’s 2% target after years of undershooting it. Central bank officials say the target is symmetric, meaning they expect inflation will drift mildly above and below it at different times.

Price pressures softened beginning last fall, although officials had expected inflation to keep rising amid strong hiring and a burst of fiscal stimulus fueled by tax cuts and government spending.

If inflation runs too far below 2% for a while, it would show “our setting of monetary policy is actually restrictive, and we need to make an adjustment down in the funds rate,” Chicago Fed President
Charles Evans
said Monday, referring to the central bank’s benchmark federal-funds rate.

Mr. Evans said his forecast was for inflation to rise over the coming year, justifying a rate increase in late 2020 and possibly again in 2021 to keep price pressures under control.

But if it turns out that core inflation, which excludes volatile food and energy categories, falls and stays near 1.5% for several months, “I would be extremely nervous about that, and I would definitely be thinking about taking out insurance in that regard” by cutting rates, he said.

Dallas Fed President
Robert Kaplan
didn’t endorse such a move outright but said Thursday that inflation running persistently around 1.5% or lower is “something I’m going to certainly take into account” when setting rates.

Clearly communicating the rationale for an interest-rate cut would be especially important to avoid signaling alarm about the broader economic outlook, which could chill spending and investment. “We would need to be very careful,” said Mr. Evans.

Fed Vice Chairman
Richard Clarida,
speaking earlier this month on CNBC, appeared to be lowering the bar for such a move. He volunteered that a recession wasn’t the only situation in which the Fed had cut rates in the past, pointing to instances in the 1990s in which the central bank “took out some insurance cuts.”

Over a 12-month period beginning in February 1994, the Fed raised its benchmark rate to 6% from 3.25%. It then cut rates at three meetings between July 1995 and January 1996 after inflation rose less than anticipated.

Fed officials raised the rate four times last year, most recently in December to a range between 2.25% and 2.5%. They signaled last month they didn’t expect to change rates in 2019.

Recent data indicate the economy has rebounded from a slowdown at the start of the year, which could make officials more comfortable with their wait-and-see posture. While muted inflation may not warrant a rate cut for some officials, it could raise the bar for others to consider additional increases.

Cutting rates also would be complicated coming after President Trump has called on the Fed to do so. Central bank officials have said politics never influence their decisions. But Mr. Trump’s commentary puts more pressure on them to explain why they are changing policy so that doubts about their independence don’t erode their credibility in markets.

The question of whether to reduce rates if inflation slows may not be hypothetical for much longer.

Inflation readings for February and March, measured by the Fed’s preferred gauge, will be released on April 29, just before the coming policy meeting.

Forecasters at
JPMorgan Chase
expect to see that core inflation rose 1.6% in March from a year earlier, down from 1.8% in January. They see core inflation dipping to 1.5% in July. They estimate a 48% chance that core inflation falls below that level in July, and just a 7% chance it exceeds 2% in October.

Roberto Perli,
a Fed analyst at Cornerstone Macro, is among those who view an interest-rate cut as unlikely absent broader economic deterioration. “It is a tough argument to make in the near term…because while it makes sense, what if all of a sudden inflation comes back up,” he said. Being forced to later reverse the cuts by raising rates more rapidly could raise the risk of a recession.

On the other hand, if consumers’ and businesses’ expectations of future inflation were to drift lower, “the case becomes a lot stronger,” said Mr. Perli.

Fed officials believe inflation expectations strongly influence actual inflation and could partly explain why price pressures have been soft. The University of Michigan’s April consumer survey showed expectations of annual inflation over the next five to 10 years fell to 2.3% from 2.5%, matching an all-time low for the 40-year series.

Fed Chairman
Jerome Powell
expressed his frustration with the recent readings at his press conference last month. “We’re really 10 years deep in this expansion, and inflation is still not clearly meeting our target,” he said.

The problem of soggy inflation is puzzling because economists last year expected that tax cuts and federal spending increases would boost demand at a time when they believed there was already little economic slack, pushing up inflation.

The lack of such a response suggests the economy might have more idled resources, such as workers on the job-market sidelines, or that globalization has limited the extent through which declining economic slack leads to more domestic inflation.

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